Product Diversification And Bank Risk Taking Behavior: An Empirical Evidence From Indian Banking System

Author(s) Jugnu Ansari

ABSTRACT

This study examines the relationship between product diversification and bank risk taking behavior in India over the period of 2001–2014. Our analysis shows clear evidence that the effect of risk taking behavior through product diversification depends highly on the bank’s size and ownership. The degree of product diversification is negatively associated with bank risk taking behavior for small-sized banks as compared large-sized banks. We found that ownership does matter in the pursuit of product diversification. Relative to private domestic banks, public sector banks earn significantly less fee-income but more income from other off-balance sheet activities. From a regulatory perspective, it appears that diversification benefits public sector banks. This finding suggests that deregulation encouraging banks to become more involved in non- traditional activities may have an adverse effect on the overall banking system where large-sized banks are playing a significant role in India.